Eagers Automotive's (ASX:APE) Returns On Capital Are Heading Higher

Yahoo

2 days ago

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Eagers Automotive (ASX:APE) and its trend of ROCE, we really liked what we saw.
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For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Eagers Automotive is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = AU$538m ÷ (AU$5.5b - AU$2.4b) (Based on the trailing twelve months to December 2024).
So, Eagers Automotive has an ROCE of 18%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Specialty Retail industry average of 16%.
View our latest analysis for Eagers Automotive
In the above chart we have measured Eagers Automotive's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Eagers Automotive .
Eagers Automotive is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 18%. Basically the business is earning more per dollar of capital invested and in addition to that, 31% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
Another thing to note, Eagers Automotive has a high ratio of current liabilities to total assets of 44%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
To sum it up, Eagers Automotive has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 199% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.
On a final note, we found 3 warning signs for Eagers Automotive (1 is significant) you should be aware of.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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